Income Taxes

Impact of the Tax Cuts and Jobs Act

Enacted on December 22, 2017, the TCJA significantly changed U.S. corporate income tax law by reducing federal statutory tax rates from 35% to 21%, instituting a territorial tax system that provides a 100% exemption on future repatriations from certain foreign subsidiaries, and imposing a one-time transition tax on previously deferred non-U.S. earnings. In accordance with SAB 118, the Company recorded a one-time charge of $87 million in the fourth quarter of 2017 primarily consisting of:


•	A re-measurement of the Company's net deferred tax assets due to a reduction in U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, totaling $75 million; and


•	A one-time mandatory transition tax on previously deferred earnings of foreign subsidiaries and a reassessment of the Company's assertion regarding re-investment of its non-US subsidiaries' undistributed earnings, together totaling $12 million.

The Company considered the entire $87 million charge to be a provisional estimate as of December 31, 2017.

During the three months ended March 31, 2018, the Company revised its provisional estimate of the tax associated with its non-U.S. subsidiaries’ undistributed earnings as of December 31, 2017 and recorded additional tax expense of $0.3 million, which increased its effective tax rate by 50 basis points. No other changes to the Company’s provisional estimate were recorded during the three months ended March 31, 2018.

Since the enactment of the TCJA, the U.S. Department of the Treasury and the Internal Revenue Service (“IRS”) have issued notices addressing different areas of the new law and have indicated that more guidance is forthcoming. In addition, several U.S. states have issued guidance addressing certain impacts of the TCJA. During the remainder of 2018, the Company will analyze these pronouncements, as well as others that may be issued, and gather any outstanding information required in order to finalize its calculation of the effect of the TCJA. The Company will record any changes to its provisional estimate in the quarter in which it completes its analysis, but no later than the quarter ending December 31, 2018.

Effective Tax Rates

The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented.

The Company’s effective tax rates are as follows:



	Three Months Ended March 31,
	2018	2017
Effective Tax Rate	18.6%	28.0%

The Company’s effective tax rate for the three months ended March 31, 2018 is lower than the prior year’s comparable primarily due to the TCJA; specifically, the favorable effect of the reduction in the U.S. statutory tax rate, partially offset by the following effects:


•	Elimination of the U.S domestic manufacturing deduction


•	A change in the Company’s assertion regarding the reinvestment of its non-U.S. earnings


•	Non-U.S. jurisdictions with statutory rates higher than the U.S


•	Elimination of certain compensation-related deductions


•	Changes in the U.S. taxation of non-U.S earnings

The Company's effective tax rate for the three months ended March 31, 2018 is lower than the statutory U.S. federal tax rate of 21% primarily due to excess tax benefits associated with share-based payments and the U.S. federal research credit. These items are partially offset by U.S. state taxes, earnings in non-U.S jurisdictions with statutory rates higher than the U.S. and certain expenses that are statutorily non-deductible for income tax purposes.

Unrecognized Tax Benefits

During the three months ended March 31, 2018, the Company's gross unrecognized tax benefits, excluding interest and penalties, increased by $0.1 million primarily as a result of tax positions taken in both the current and prior periods. During the three months ended March 31, 2018, the total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate increased by $0.4 million. The difference between these amounts relates to (1) offsetting tax effects from other tax jurisdictions, and (2) interest expense, net of deferred taxes.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the three months ended March 31, 2018, the Company recognized $0.4 million of interest and penalty expense related to unrecognized tax benefits in its Condensed Consolidated Statement of Operations. At March 31, 2018 and December 31, 2017, the total amount of accrued interest and penalty expense related to unrecognized tax benefits recorded in the Company’s Condensed Consolidated Balance Sheets was $6.9 million and $6.5 million, respectively.

During the next twelve months, it is reasonably possible that the Company's unrecognized tax benefits may decrease by $13.2 million due to expiration of statutes of limitations and settlements with tax authorities. However, if the ultimate resolution of income tax examinations results in amounts that differ from this estimate, the Company will record additional income tax expense or benefit in the period in which such matters are effectively settled.

Income Tax Examinations

The Company's income tax returns are subject to examination by the U.S. federal, U.S. state and local, and non-U.S. tax authorities.

The Company’s consolidated federal income tax returns for the years 2014 through 2016 remain subject to examination by the IRS. In addition, acquired subsidiaries’ federal tax carryforwards (2007 through 2012) remain subject to IRS examination.

With few exceptions, the Company is no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2011. Currently the Company and its subsidiaries are under examination in various jurisdictions, including Germany (2010 through 2012), Canada (2013 through 2015) and the state of California (2012 and 2013).